Research Seminar: Media Tone and Expected Stock Returns
Speaker: Sha Liu, University College Dublin
We find that media tone reflects firm-level expected returns—firms with low-negative tone stories over a few months earn higher returns than do firms with high-negative tone stories. The tone premium is driven by consistent outperformance of low-negative stocks, while high-negative stocks do not produce significant abnormal returns. We find that low-negative stocks are on average riskier and more profitable than high-negative stocks—the main rational reasons that they earn higher returns. However, the market is not fully efficient with respect to low-negative (i.e., positive) tone, as a large part of the outperformance cannot be explained by the well-known pricing factors. Our findings tentatively support the notion that financial media coverage and tone are not incidental and that they are likely to be affected by managerial efforts and conflicts of interest. Nonetheless, there is no evidence that the credibility of major newspapers has been affected.